5 Mutual Funds to Benefit from India's Expanding Railway Network

The Indian railway industry has been the backbone of the country's transportation system and the cornerstone of India's economy. From bustling metropolises to remote villages, millions of Indians rely on the railways for economical and effective transportation.

After the US, China, and Russia, India has the fourth-largest railway system in the world due to its extensive network of rail tracks that almost encircle the whole country. More than 1.4 million people are employed along its 67,850 kilometres of travel. As a result, the railway industry is India's largest employer.

In addition to being an economical and energy-efficient form of transportation, the railway network is renowned for its suitability for long-distance travel and the transit of large commodities. The Indian Railway stands out as the favourite auto transporter in the nation.

The Indian Railways, which have a long history dating back more than 160 years, have continuously changed and adapted to meet the expanding demands of a growing economy.

Under the Atmanirbhar Bharat vision, the Indian Railway Industry has recently undergone significant reforms and modernisation initiatives. The introduction of high-speed trains such as the Gatimaan Express, Tejas Express and the recently introduced Vande Bharat Express reflects India's commitment to improve travel conditions and shorten travel times.

While traditionally, the sector has been operated by government-owned businesses; regulators are progressively moving toward privatisation, especially in the areas of engineering, ticketing, as well as other maintenance and operations.

The implementation of digital platforms and mobile applications has streamlined ticketing processes, making it more convenient for passengers to book tickets and access information.

Government's boost to Indian Railway Industry...

It has always been important to upgrade India's railway system, but never before has the government expressed such a keen interest. The news that the Indian government would implement a production-linked incentive (PLI) scheme for manufacturers of train components gave the railway industry a significant boost last month.

Recently, the Indian-made 1.54 million (m) forged wheels were ordered by the railways. This is a step in the nation's drive to draw in international manufacturers and lessen its reliance on imports.

[Read: Top 5 Mutual Funds That Are Betting on the Manufacturing Boom]

In the Union Budget FY 2023-24, the railway sector was the biggest beneficiary. A record of Rs 2.4 trillion was announced for revamping the infrastructure for railways. Part of the funds will be used for the Railways' ambitious plan to lay approximately 100,000 km of new track over the next 20-25 years.

The government has also approved Rs 576.13 billion for the green mobility scheme, seven multitracking rail projects worth Rs 325 billion to add 2,339 km of rail track, and an upskilling and concessional credit scheme worth Rs 130 billion.

As a result, the process of enabling Foreign Direct Investment (FDI) in railways to upgrade the infrastructure for goods and high-speed trains has advanced fast. Several domestic and international businesses are currently exploring to invest in rail projects in India.

In this article, we will explore the Indian railway industry and identify the potential investment opportunities for investors willing to enter this sector.

About Indian Railway Stocks

Due to its scale and extensive network of connections to many industries, the Indian railway industry may experience a growth in demand for its services. As a result, India will likely experience a forward push for the Indian Railway Stocks.

In fact, not only will this demand increase the share price of the railway, but also of the businesses that produce railway components. There are a number of businesses on the market that produce elements like wheelsets, truck frames, and other structural and stability components for cargo, wagons, and passenger coaches.

As per historical data, the Indian Railway Stocks performed significantly in the first half of 2023. Furthermore, railway stocks saw significant gains with Nifty's surge and breach of the 20,000 mark hitting a record high at 20008.05 on Monday, September 11, 2023.

[Read: Indian Equities Near a Lifetime High! Why Investing in Multi-Asset Funds Now Makes Sense]

This rapid price appreciation has caught everyone's attention in the market; many investors are interested in Railway Stocks these days.

Railway Stocks were the primary driver of one of the first large investment surges in India, and over a century later, the railways are still crucial to the economy. Businesses in the railway sector that provide rail transportation for people and goods make up the Railway stocks sector. This also includes businesses that carry out maintenance and switching tasks.

Here's a list of the top Railway Stocks in India in 2023:

• Indian Railway Catering & Tourism Corporation (IRCTC)
• Indian Railway Finance Corporation (IRFC)
• BEML Ltd. (Bharat Earth Movers Limited)
• Container Corporation of India Ltd. (CONCOR)
• RITES Ltd.
• Titagarh Rail Systems
• Railtel Corporation of India, etc.

*(The securities quoted are for illustration only and are not recommendatory).

The Future of Indian Railways: How to Invest in This Growing Sector

Given increased incomes and population expansion, there will undoubtedly be an increase in the demand for railway services. With around 22,593 active trains (9141 freight and 13,452 passenger trains), India has the fourth-largest railway network, carrying 24 million passengers daily and 203.88 million tonnes of freight.

Freight and passenger numbers have continually increased for the Indian Railways since 2015-16. The industry was entirely destroyed by the pandemic, and all passenger railway service-aside from those for freight and migrant workers-was stopped.

Nevertheless, post-pandemic with increasing urbanisation and rising income (both urban and rural) is driving growth in the passenger segment. The total passenger revenue stood at USD 8.51 billion during 2022-23. Revenue growth has been strong over the years; Indian Railways' revenue reached USD 5.21 billion in the third quarter of FY 2022-23.

India's Railway industry is on the cusp of a revolution, which will open up more opportunities for businesses in India, especially tourism. In India, unlike the United States of America, the government continues to control the railway sector. The government has just recently been considering the admission of private players to operate stations, manage routes, and run trains.

Thus, it can be said that the earnings of the listed Railway Stocks are directly dependent on the growth of the Indian railways as a whole and the initiatives of the government.

To enable the nation to connect its rail network with other modes of transportation and create a multi-modal transportation network, the government will construct a 'National Rail Plan.'

The Research Designs & Standards Organisation (RDSO), the research division of Indian Railways, has introduced a 'New Online Vendor Registration System' to have digitised and open systems and processes. Indian Railways claims that these projects have the potential to attract significant investment in the upcoming years.

With 15,000 km being converted to automatic signalling and 37,000 km being equipped with 'KAVACH' the domestically built Train Collision Avoidance System, Indian Railways is generating and developing technology in fields like signalling and telecommunication.

The Indian Railways has decided to undertake electrification of Broad Gauge (BG) rail lines in a mission mode and is likely to complete the process by 2023-24.

Under the Union Budget 2023-24, a capital outlay of Rs 2.40 lakh crore (USD 29 billion) has been allocated to the Ministry of Railways, which is the highest ever outlay and about nine times the outlay made in 2013-14.

Rail infrastructure will see an investment of Rs 50 lakh crore (USD 715.41 billion) by 2030. FDI inflows in railway-related components stood at USD 1.23 billion from April 2000- March 2023, and the government has allowed 100% FDI in the railway sector.

The Indian Railway network is expanding in a positive direction. The Indian Railway market is anticipated to account for 10% of the global market in the next five years, making it the third largest.

Understanding the significance of railway shares in your investment portfolio as a savvy investor can open up a world of opportunity, providing stability and growth. The most prudent way for investors to invest in Indian railway stocks without the high risk of direct equities is via mutual funds.

[Read: How to Strategically Approach Equity Mutual Funds in Volatile Markets]

Let's dive deep into the world of Indian Railway stocks. Below I have mentioned the top 5 mutual funds holding high exposure to these rail sector stocks.

#1 - Nippon India Power & Infra Fund (Sectoral Fund)

Nippon India Power & Infra Fund invest predominantly in equity/equity-related instruments of the companies engaged in India's power and infrastructure space.

The scheme currently has an AUM of Rs 2,544.80 crore and is benchmarked against Nifty Infrastructure TRI. It invests across the market cap, and as of August 2023, it holds 51.58% allocation in large caps, 16.25% allocation in mid-caps and 25.61% in small caps.

The scheme holds an overall allocation of 8.34% in Railway stocks as of August 2023. It includes 5.27% in stocks of RITES Ltd., a Miniratna Schedule 'A' Central PSU under the Ministry of Railways. It is a leading player in the transport consultancy and engineering sector in India.

Apart from this, the scheme has a 3.07% allocation to Container Corporation Of India Ltd., which is a Navratna Company engaged in the transportation and handling of containers by rail transport.

#2 - Invesco India Infrastructure Fund (Sectoral Fund)

Invesco India Infrastructure Fund invests in a concentrated portfolio that is predominantly constituted of equity and equity-related instruments of infrastructure companies. As of August 2023, the fund has a 37.91% allocation in large-cap stocks and 23.54% in mid-cap stocks, whereas 36.51% in small-cap stocks.

Do note that the scheme holds a higher exposure to small-cap stocks. Before considering investing in this scheme, one must consider their suitability based on risk appetite and investment horizon.

The scheme holds an overall allocation of 5.05% in Railway stocks; it includes exposure to market leaders in the Indian Railway industry - like 2.54% in BEML Ltd., which is a PSU under the Ministry of Defence, Govt. of India and plays a pivotal role in manufacturing a variety of heavy equipment, such as that used for earth moving, railways, transport and mining. Further, the scheme has a 2.50% allocation to Container Corporation Of India Ltd.

#3 - Kotak Infra & Eco Reform Fund (Thematic Fund)

Kotak Infrastructure and Economic Reform Fund invests in equity and equity-related securities of companies involved in the economic development of India as a result of potential investments in infrastructure and unfolding economic reforms.

The scheme invests across market cap, and as of August 2023, it holds 33.97% allocation in large caps, 35.09% allocation in mid-caps, and 27.65% in small caps. Do note that the scheme holds a majority of its assets in mid and small-cap stocks, which are highly volatile and risky in nature. Ensure your suitability to the fund before considering any investment.

Currently, the scheme has an AUM of Rs 1096.52 crore, and it has an overall allocation of 4.19% to Railway stocks. As of August 2023, the scheme holds a fair allocation of 3.80% and 0.38% in Container Corporation Of India Ltd. and BEML Ltd., respectively.

#4 - ICICI Pru PSU Equity Fund (Thematic Fund)

Recently launched in September 2022, ICICI Pru PSU Equity Fund aims to invest predominantly in equity and equity-related securities of Public Sector Undertakings (PSUs). The scheme invests across market caps with a major allocation of 68.94% to large caps, 17.24% to mid-caps and 5.24% to small caps as of August 2023.

Being a Thematic Fund, the scheme carries a concentration risk due to exposure to a single sector. As of August 2023, it has an allocation of 4.14% to the Railway stock of Container Corporation Of India Ltd. The company commences operations all over the country in 7 Inland Container Depots of Indian Railways located at Delhi, Ludhiana, Bangalore, Coimbatore, Guwahati, Guntur, and Anaparti.

Bear in mind that the scheme is new in the market and does not carry a long performance track record; thus, investors may consider their suitability before investing in this scheme.

#5 - Tata Quant Fund (Thematic Fund)

Tata Quant Fund aims to generate long-term capital appreciation by investing in equity-related instruments selected based on a quantitative model (Quant Model).

The quantitative models used by quant funds are designed to detect investment opportunities in the market. The complex mathematical models carry out the buy/sell decisions without fund manager intervention. Launched in January 2020, the scheme holds an AUM of Rs 41.53 crore and is benchmarked against S&P BSE 200 TRI.

The scheme holds an allocation of 4% in Railway stocks of Indian Railway Catering And Tourism Corporation Ltd. (IRCTC), which is an Indian public sector undertaking that provides ticketing, catering, and tourism services for the Indian Railways.

*(All the scheme related data is collated by PersonalFN Research, Source: ACE MF)

This marks the conclusion of our article discussing the best Railway Mutual Funds that an investor seeking exposure to Railway stocks may consider

To summarise...

For investors seeking to diversify their portfolios and take advantage of the growing potential of the Railway industry, the Union Budget's announcement of new projects, renovation of premium coaches, and increased funding for track restoration presents a compelling opportunity.

Additionally, the factor that makes Railway stocks an attractive investment opportunity is the government's dedication to enhancing the nation's transport infrastructure.

All things considered, it is clear that Railway stocks will always be in demand because of their high sustainability and growth potential. However, investors may position themselves to ride the rails of success in the ever-evolving world of Railway stocks by adopting a diversified approach, a long-term outlook, and remaining well-informed.

Prior to investing in Railway stocks through mutual funds, one must take into account their suitability for the fund, undertake thorough research of the holding railway companies, and evaluate the performance of the mutual fund schemes.

[Read: Begin with Minimum Investment in Mutual Funds And Watch Your Money Grow]

Happy Investing!

Disclaimer: This write-up is for information purposes and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. It is for educational purposes only. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right funds to meet your financial goals. If you are not sure about your risk appetite, consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...